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5 Common Payroll Errors and How to Avoid Them

March 23, 2021 Blog Post

Learn how Paylocity's payroll software can help companies avoid the 5 most common payroll errors. Stay on track with new laws, taxes, and employee classifications.

Woman in blue shirt with painted nails typing on computer and using a calculator in other hand.

Paying employees is a necessary part of doing business. On the surface, this seems like the least complicated workflow your company needs to manage. The truth is, there are a number of common payroll mistakes that companies make — and many of these can be extremely costly. Not only do you run the risk of an audit, but you can damage your relationship with employees and cause a major headache in pinpointing and fixing the issue that caused the error in the first place.

To avoid payroll errors, you need to know what they are and how to identify them. You also need an excellent payroll solution in place to help streamline your process.

What Is a Payroll Discrepancy?

A payroll discrepancy is any difference between what should be calculated and what is included on the employee's paycheck. This might mean that hours are missing, so the employee worked more hours than the payroll has accounted for. A discrepancy can also mean an overpayment, which can be extremely costly for the company — especially if it's a processing error that caused all wages to be overpaid.

There are several different discrepancies that can occur. Taxes might be improperly assessed, overtime might not be included, or overtime hours might be miscalculated. Any payroll error has some repercussions, and it's important that they are identified and fixed as soon as possible. You also can't depend on the employee to bring an error to your attention. They may not identify the error. If its root cause is in the way you're processing payroll, the error will likely be repeated every pay cycle until it's caught and remedied.

What Are the Most Common Payroll Errors?

Any area of payroll reporting, data, and management is susceptible to error when you think about it. It really comes down to the accuracy of your information. If you accidentally mistyped something in the payroll, it's going to be wrong. The wrong number of hours will mean that everything on that payment cycle will be inaccurate.

You also need to be concerned with the overall information that's included in your payroll software on any set employee. This might include their tax filing status, number of dependents, and their salary/wages. Any miscalculation will cause payroll discrepancies in every cycle until it's corrected.

Your payroll software has features to help you avoid errors. Here are some of the most common payroll mistakes that companies make:

  • Incorrect Tax Forms: Your employee uses their W-2 and any other company-issued tax form to pay their income taxes. Any mistake here will cause problems for the company and the employee.
  • Misclassification of Employees: The classification of employees is a legal matter, not a company choice. Classifying an employee as an independent contractor will result in a significant problem because the company will need to pay fines and taxes, as well as interest. You may have independent contractors working for your company, as well as permanent employees. Make sure they are classified correctly in payroll.
  • Not Updating Tax Rates: Tax rates are subject to change, and it's the company's responsibility to stay informed and make those changes in payroll.
  • Not Tracking Employee Hours Correctly: If there are mistakes in the number of hours the employee worked, the pay will be off. It's important to have solutions in place that make it easier for employees and managers to have accurate records of employee hours.
  • Errors in Calculating Overtime: Overtime can be a difficult thing to calculate because it may differ per employee. Salaried employees do not receive overtime, but companies need to be careful in classifying these employees. Nonexempt employees are entitled to overtime when they work more than 40 hours a week.

How Long Does a Company Have to Correct a Payroll Mistake?

The answer to this question depends on the state your company is in and the laws of that state. Overall, though, it's important to fix payroll mistakes as soon as you become aware of them. The longer it takes to fix an error, the more likely you're compounding the problem. If the error is caused by faulty information in your payroll software, that error needs to be fixed before the mistake can be rectified.

In most cases, there will be a statute of limitations on the amount of time an employee has to collect payment owed to them. This time period may differ from state to state, but the most common is two years. For your company, it's important that your payroll accounting is audited internally on a scheduled basis to avoid these errors and identify them to remedy them quickly.

Apologizing for Payroll Processing Mistakes | The Employee Payroll Error Letter

Miscalculated payroll can impact your relationship with your employees. The best way to handle this is by being as forthright as possible and correcting the error. Your employee needs that information in writing. The employee payroll error letter should be kept in the employee file and in your internal records, as well.

The letter should explain the discrepancy, show how it was remedied, and explain what caused the initial error in the first place. This level of transparency helps the employee understand the issue and brings clarity to your own records.

How to Avoid Payroll Mistakes

Paylocity's solution gives you all the tools you need to track time and attendance, handle expense management, and accurately prepare and file taxes. With an intuitive dashboard and easy-to-use features, you have access to all the information necessary to run robust reporting options and maintain your payroll obligations at all times.

How Paylocity's Payroll Solution Can Help

Paylocity's payroll solution is perfect for businesses that need a full solution for the modern workforce. Stay on track with new changes to laws, taxes, and your current employee classifications. Never miss a beat with an easy-to-follow workflow. Schedule a demo today!

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